Can Big Tech survive the energy squeeze with profits that are 'AI-or-die'? McGeever

"AI or die."

Last week, Kristalina Georgeeva, Managing Director of the International Monetary Fund, spoke to a panel during the IMF/World Bank Spring Meetings in Washington about the challenges facing businesses, industries and economies across the globe, given the 'transformative power' of artificial intelligence.

Her remarks also apply to the stock exchange.

U.S. Big Tech experienced a significant wobble in its first quarter, and subsequently repricing. However, it has roared to life in the past three weeks, with the market's confidence in AI productivity rising higher than ever.

Investors will get a better sense this week if this optimism is warranted. Tesla, the first "Magnificent 7" megacap to release results, releases its first-quarter earnings on Wednesday. IBM and Intel will also be reporting this week.

The markets are expecting even more good news. U.S. stock markets have risen to new highs despite the Iran War and the shock of the energy supply. On Friday, the Nasdaq recorded its 13th consecutive daily gain. This is its longest winning streak in over 20 years. If the rally continues through Monday, this will be the longest run since June 1987. S&P 500 has also gained 13% over the last three-weeks.

However, the rebound has been largely unbalanced and driven by a small number of Big Tech companies. According to Liz Ann Sonders of Charles Schwab, less than 10 percent of S&P 500 stock are trading at 52 week highs.

?S&P 500's tech sector now accounts for nearly 35%, which is close to October's 36% record. The combined market capital of the tech and communications sectors is less than one percentage point away from October's record 46%.

The concentration risk is back!

A downward shift in the high AI sentiment could have a large impact on the market. With global energy prices at their highest level in five years there is concern that the bullish outlook for Big Tech, a sector which consumes a lot of energy, could change.

Power Up

The BNP Paribas economists believe that the AI boost "comfortably overshadows" all negative shocks in the coming years. However, negative shocks are likely to be more significant this year and the following year.

Last week, they stated that if current AI capex pledges were met in full it could lead to a significant increase in power prices and reduce the productivity benefits from AI deployment.

Morgan Stanley estimates that these capex pledges total over $800 billion. This includes $635 billion from the hyperscalers Microsoft and Amazon alone this year, as well as Alphabet, Meta and Meta in general.

Also, the numbers for energy demand are staggering.

Morgan Stanley's energy analysts had estimated the total U.S. demand for data center electricity through 2028 to be 69 gigawatts. They warned of a possible 44 GW shortage. Now, they see the demand rising to 80 GW and the potential shortfall increasing to 55 GW. Ten gigawatts is enough to power 10 nuclear power plants of medium size.

The prices Big Tech will have to pay are likely to be higher than anticipated, as AI-driven energy demand is increasing and the supply of that energy is constrained. Hyperscalers could see their profits eroded by this.

As Melissa Otto of S&P Global Visible Alpha told us last month, this could hinder capex plans entirely.

Otto stated that "I think if capex numbers are pulled back and if energy prices do not reflect in earnings, then this could be a catalyst for a pullback in the equity markets".

The energy price spike may be only a temporary concern, and will soon be forgotten as AI continues to grow. Rising geopolitical tensions may also benefit Big Tech as the disintegration of the global order is likely to only intensify the AI arms race.

If JPMorgan's Nikolaos Pantigirtzoglou's right, investors will continue to hold a large position of short in the benchmark tech exchange-traded funds (ETFs) 'QQQ.' There is also room for accelerating the AI trade in the near term.

Investors may well adopt the motto "AI or Die" in the next few years. And for good reason. If energy prices remain high for longer, the revolution and stock market may not progress as quickly as expected.

Save the date! On April 23, at 1300 GMT/9 a.m. EST, ROI columnists Mike Dolan, and Jamie McGeever, will be joining LSEG in a webinar entitled "ROI Markets: Rethinking Safe Havens in Uncertain Times". Sign up by clicking here.

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(source: Reuters)